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Extra2/14/2008 12:20 PM ET

Chocolate prices soar

Expect to pay more for that Hershey bar: Just in time for Valentine's Day, a cocoa price surge is making sweet somethings more expensive than ever.

By Elizabeth Strott

It's Valentine's Day, and that means big business for the chocolate industry. Lovers and friends around the world send and receive boxes of chocolates in all shapes and sizes.

But for chocolate makers, the news isn't so sweet: A global surge in cocoa futures has their costs soaring. Cocoa futures for March delivery traded at $2,485 per metric ton in today's session, a three-year high and nearing a 23-year record; the last time cocoa traded above $2,500 was April 1985.

"Prices are a lot higher this year," said Alaron Trading's Boyd Cruel, who trades cocoa. In February 2007, cocoa traded at $1,600 to $1,700. "This is definitely going to affect those chocolate makers," Cruel said.

A pricier Hershey bar

Those cocoa price gains are now starting to hit stock prices -- and grocery shelves.

Hershey (HSY, news, msgs) warned just two weeks ago that it was raising the price of its chocolate bars because of rising prices for commodities, including milk and cocoa. "Our products include far more pure milk chocolate and solid chocolate than our competitors," Hershey spokesman Kirk Saville told The Associated Press at the time.

Hershey increased the price of standard bars, king-sized bars and six-pack bars by 13%. It was the second time in a year that Hershey boosted the price of its chocolate bars; last April, Hershey raised the price of the same chocolate products by 4% to 5%.

Cadbury Schweppes (CSG, news, msgs) has also warned about rising cocoa prices. We "have recently implemented price increases in many of our confectionery markets to offset continued sharp rises in food commodity costs," the company said in a December 2007 press release.

"It is inevitable that some chocolate prices will go up to compensate for very significant increases in costs," the company's finance director Ken Hanna said in December.

Hershey shares have fallen 9% over past three months; Cadbury is down 6% over the same period.

Fewer supply disruptions than thought

A year ago, analysts were fretting that the world chocolate supply would be threatened by both climate and political shifts in Africa.

But in fact, the current price surge is due less to supply issues than to market forces, explained Alaron's Cruel. "A lot of it is fund buying coming into the . . . cocoa, coffee, sugar markets," Cruel said. "Funds wanted to expand and move into this sector because they've been very active in all the other commodities."

Strikes and work stoppages in Ivory Coast, which produces about 43% of the world's cocoa, have slowed the movement of cocoa, but overall, they "didn't have a major impact on the markets," Cruel said.

Anything that affects the time when cocoa farmers harvest and move cocoa beans -- from September through the middle of January -- can affect supply. In the beginning of harvest season last year, Ivory Coast was hit by heavy rains, which delayed the production process, Cruel explained, noting that the rains caused concern that the crop would be hit by disease.

Three million tons of cocoa, worth $5.1 billion, are produced around the world each year. More than 36 million heart-shaped boxes of chocolates are sold for Valentine's Day, according to the Chocolate Manufacturers Association.

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